Bankers Press Regulators to Gut Volcker Rule
Banks are seeking a laundry list of carve-outs that would give financial institutions so many exceptions from the rule that it might as well not exist at all.
Insurance Networking News, November 19, 2010
If the banking industry has its way, regulators would give financial institutions so many exceptions from the Volcker Rule's limits on risky activities that it might as well not exist at all.
In comment letters to regulators studying how to implement the rule, banks are seeking laundry lists of carve-outs, including broad exceptions from what is considered proprietary trading and greater freedom to invest in private-equity firms and hedge funds.
Though banks lost the battle in Congress to prevent the Volcker Rule's inclusion in regulatory reform, the letters make it clear many are hoping to win the war as regulators implement its restrictions.
Some in the business community are hoping regulators will ignore the rule altogether.
"The implementation issues presented by the Volcker Rule may create a system that is too rigid for vibrant, dynamic capital markets," wrote David Hirschmann, the president and CEO of the Chamber of Commerce's Center for Capital Markets Competitiveness. "The CCMC has serious concerns that the Volcker Rule is unworkable and will harm the U.S. financial services sector because it will place American firms at a competitive disadvantage."
The length and breadth of the exceptions being sought run the gamut.
Many banks are targeting the definition of "proprietary trading," which is meant to cover trades that are made for the benefit of the bank, not a customer. But some are also seeking to widen exemptions already granted under the law. The Dodd-Frank Act bans proprietary trading but makes exceptions for the trading of government obligations, activities related to underwriting and market-making, risk-mitigating hedging, insurance activities and Small Business Administration small-business investment company investments.
The industry is also trying to broaden the exemptions from a ban on investments in private-equity firms and hedge funds. Under the law, banks are allowed to own as much as 3% of the interests of a fund, with an overall cap that cannot exceed 3% of a bank's Tier 1 capital. But banking companies like Bank of New York Mellon, Northern Trust and State Street are focused on exemptions from the requirement for trustee services or custodial activities.
The Volcker Rule's defenders clearly anticipated the onslaught of industry comments. Former Federal Reserve Board Chairman Paul Volcker has warned regulators to be careful as they write the rules and not to be overly swayed by bankers' complaints.
"Clear and concise definitions, firmly worded prohibitions, and specificity in describing the permissible activities will be of prime importance for the regulators as they implement and enforce this law," wrote Volcker. "Bankers and their lawyers and lobbyists will no doubt search for and discover ambiguities within the language of the law."
Lawmakers, meanwhile, are taking sides. Sens. Jeff Merkley, D-Ore., and Carl Levin, D-Mich., who pushed to include the Volcker Rule in the Dodd-Frank bill, urged regulators to reject banks' arguments to weaken it before it is even implemented. They were backed by Sen. Tom Udall, D-N.M., who said regulators should create clear, concise definitions to avoid ambiguity.
"Without strong definitions of permitted activities, it will only be a matter of time before unscrupulous actors return to perilous trading practices," Udall wrote. "Any implementation will be futile without the creation of enforceable guidelines, including clear oversight responsibilities among regulators."
But other lawmakers pushed for certain exemptions. Sen. Tom Harkin, D-Iowa, for example, said regulators must not target insurance investments as part of the proprietary trading ban; these are not risky investments, he argued.
"So long as those separate accounts are managed for the benefit of those programs and the insurance company's customers, then it seems that these activities may be appropriately protected by the permitted activity allowing for investments 'on behalf' of customers, regardless of whether the insurance company is technically the 'owner' of the assets of the account," Harkin wrote.
Bankers generally were focused on how regulators would define "proprietary trading" and on key exemptions already in the law.
The Clearing House Association LLC, a group of commercial banks, called for several products to be exempted from the ban, including the purchase and sale of loans, portfolio hedging, asset and liability management, trading in loans and loan participations, securities not treated as trading securities under generally accepted accounting principles, agency trades, riskless principal trades and any other trade initiated for a customer.
The association also argued for expanding the existing market-making and hedging exceptions in the law.
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